1. Statement of Cash Flows
Chapter 11
Statement of Cash Flows
This chapter is divided into 2 parts:
Part A: Formatting the statement of cash flows
Part B: Preparing the statement of cash flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.

2. Participation Questions – Chapter 11
The dates for the final exam are which of the following: - April 28 – 29 only
Which publicly traded corporation was showing a cash outflow for the operating cash flow section?
JC Penney
Apple Computers
Target
Walmart
In which section of the cash flow is the full value of the cash received for a sale of plant equipment shown?
Operating
Investing
Financing
The ‘retained earnings’ account is included on the cash flow statement?
True/False
Investing activities are associated with the long-term liabilities section of the balance sheet.

3. Announcements Due 4/21/16 Final Exam 4/28 – 4/29
Student Evaluations… Open in my.ucf.edu – please provide feedback!
Due 4/21/16
Final Exam Review sessions - During normal class on 4/21/16 (I will go through study guide and Louis will do exam review).
Accounting Research Survey – 3 points extra credit – available next week until Thursday April 21
SARC Tutoring Lab open through Friday 4/22/16.
SARC Final Exam Study Session in the Student Union
Saturday, April 23 from 1:30 pm to 3:30 pm in Key West CD
Tuesday, April 26th from 11:30 am to 1:30 pm in Key West AB
Assignments – Due 4/24/16
Chapter 11 Homework (Connect) – unlimited attempts
Participation questions for Chapter 11 (Webcourses) – 1 attempt
SEC Annual Report Assignment (Webcourses) – 1 attempt. Please wait until we have started chapter 11 to work on this assignment.
Tutoring Lab hours - CBA Tutoring Lab Rm #355 open thru Monday, 4/25/16 only.
Learn Smart Extra Credit for Block 3 - Chapters 8 – 11 closes on April 27th at 11:59 PM.
Final Exam 4/28 – 4/29

4. Sears Deal: More REIT Than Light – WSJ
Sears – Net loss for year end 2014 = ($1.8 billion) Cash flow generated from operating activities = a ($1.4 billion) use of cash. The way Sears Holdings keeps scissoring off assets, maybe it should rename itself Shears. The retailer plans to raise more than $2.5 billion by selling 254 properties to a real-estate investment trust it has formed and then leasing them back. The REIT, Seritage Growth Properties, will fund the purchase partly by selling stakes to Sears shareholders through a rights offering. These moves -- just the latest in a series of cash-raising exercises that include last year's reduction of its stake in Sears Canada and spinoff of Lands' End -- will provide the firm with much-needed funding. Sears burned through about $1.6 billion of cash in the fiscal year ended January. That left it with just $250 million on hand, and an additional $800 million available to it through a revolving credit facility.

5. Questions to be Answered
Overall - How has society shaped today’s financial reporting?
Chapter 11 – Since net income does not directly correlate to the cash change in an organization, how do we track the actual cash flow of the organization through an accounting period? 

7. What’s up for our Final Chapter?
Why is understanding Cash Flow Important?
How do the accountants measure actual cash flow during an accounting period?
Preparation of Cash Flow
Indirect Method – Start with Net Income
Operating
Investing
Financing

8. Terminology
Identify whether an activity or transaction increases or decreases the cash account (can be indirectly…)

9. 2 Cash Flow Preparation Methods – Only differ for Operating Section
Direct Method – adjust the items on the income statement to directly show the cash inflows and outflows from operations.
Indirect Method – begin with net income and then adjustments to net income, in order to arrive at operating cash flows. This method is used by 99% of all major corporation in the United States.
Indirect Measurement:

10. LO1 Classification of Transactions
Categories of Cash Flows
Operating activities
Investing activities
Financing activities
Include cash receipts and cash payments for transactions relating to revenue and expense activities
Company makes investments involving the purchase and sale of long-term assets and current investments using cash
Inflows and outflows of cash resulting from the external financing of a business (Long-term Debt and Invested Capital)
The three primary categories of cash flows are:
Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities. These are essentially the very same activities reported on the income statement. In other words, cash flows from operating activities include the elements of net income, but reported on a cash basis. Common examples of operating activities include the collection of cash from customers
or the payment of cash for inventory purchases, salaries, and rent. .
Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Companies periodically invest cash to replace or expand productive facilities such as buildings, land, and equipment. They might also invest in other assets, such as stocks or bonds of other firms, with the expectation of a return on those investments. Eventually, many of these assets
are sold. Investment in and sale of long-term assets and investments are common examples of investing activities.
Financing activities are both inflows and outflows of cash resulting from the external financing of a business. A major portion of financing for many companies comes from external sources, specifically stockholders and lenders. Common financing activities are borrowing and repaying debt, issuing and repurchasing stock, and paying dividends.
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11. Sources of Information for cash flow
Operating activities
Income Statement
Current Assets
Current Liabilities
Investing activities
Long-term Assets
Financing activities
Long-term Liabilities
Stockholders’ Equity

12. Apple Computers

13. Apple Computers

14. Apple (Operating)

15. Apple (Investing & Financing)

16. JC Penney

17. JC Penney

18. JC Penney

19. JC Penney

20. Noncash Activities – (Informational Purposes Only)
Transactions that don’t increase or decrease cash
Involves investing (Long-term assets) and/or financing activities (Liabilities or stockholders’ equity) – for our class
Excluded from the statement of cash flows
Reported in a separate note to the financial statements as noncash activities
Purchase of long-term assets by issuing debt
Purchase of long-term assets by issuing stock
Exchange of long-term assets
Conversion of bonds payable into common stock.
Examples:
Transactions that don’t increase or decrease cash, but that result in significant investing and financing activities are known as noncash activities.
Since these transactions do not affect cash, they are excluded from the statement of cash flows. Instead, these are reported in a separate note to
the financial statements as noncash activities.
Examples of significant noncash investing and financing activities include:
Purchase of long-term assets by issuing debt.
Purchase of long-term assets by issuing stock.
Conversion of bonds payable into common stock.
Exchange of long-term assets.
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21. Preparing the Statement of Cash Flows
Part B
Preparing the Statement of Cash Flows
In this section, we first look at the steps involved in preparing the statement of cash flows, and its basic format. Then we work through these steps in preparing the operating, investing, and financing activities sections of the statement of cash flows.
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22. Indirect Method – Order of Preparation
Operating Section
Calculate Adjusted Net Income
Calculate Cash changes in Current Asset and Current Liabilities Accounts
Investing Section
Show cash changes to Long-term Asset accounts
Financing Section
Show cash changes to Long-term Liabilities and Stockholders’ Equity

23. Operating Activities
Steps: Two separate sets of calculations in the operating section:
Part A - Calculate Adjusted Net Income
Net Income – The operating section starts with Net Income.
Add back any Non-cash Expenses.
Since Net income includes some expenses that are not cash (i.e. depreciation), these Non-cash Expenses are reversed to negate their impact to Net Income.
Reverse the effects Gains and Losses on sales of long-term assets
The full value of the cash received for the sale of long-term assets will be shown in the investing section.
Part B – Indirect cash changes to current assets and current liabilities:
Compare the changes in account balance over the prior two years. Each change will indirectly represent either a source or use of cash.
Increase in the Inventory account represents a use of cash.
From the income statement, take net income, depreciation, depletion, and amortization expense, and any gains or losses on the sale of long-term assets. From the comparative balance sheets, compute the increase or decrease in each current asset and current liability account.

24. Part A, Step 1 – Start with Net Income

25. Part A, Step 2 – Add Back Noncash Expenses
Depreciation and/or amortization are non-cash expenses that have been deducted from revenue to calculate Net Income.
The affect on cash for these items was shown in the investing section when the asset was acquired.
How to address in Cash Flow: These amounts are added back to Net Income to reverse (neutralize) their impact.
$ Cash
$Benefit
Time Periods
Cash usage incurred to purchase
an asset in time period 0

26. Example of Non-cash Expense (Attempting to get as close to cash as possible)

27. Part A, Step 3 - Gains and Losses on Sale of Plant Assets
The full value of the cash received for the sale of plant assets will be shown in the investing section of the cash flow.
Therefore, any gains or losses contained in the income statement (operating section of the cash flow) based on the sale of assets will be counting the cash twice (sort of…) on the cash flow statement, so the effect of the gains/losses needs to be removed from the income statement.
How to address in the Operating Section of Cash Flow:
These amounts are added or subtracted from Net Income to reverse (neutralize) their impact.
Gain: deduct from Net Income.
Loss: add back to Net Income.

28. Where is the cash?

29. Example of Loss on sale of asset – Cash flow
Equipment cost = $10,000 Accumulated depreciation to date = $5,000 Sales price (cash) = 4,000

30. Part B - Changes to Current Assets and Current Liability Accounts
Recognize the indirect cash changes based on the Current Asset and Current Liability account changes. These changes do not directly impact cash, but will eventually… – hence the name indirect!
Current asset account changes
Increase current asset account – Use of Cash
Decrease current asset account – Source of Cash
Current liability account changes
Increase current liability asset account – Source of Cash
Decrease current liability account – Use of Cash

31. Increase in Current Assets
It takes Cash to Acquire Current Assets – Decreases Cash

32. Decrease to Current Assets
A decrease in another current asset increases cash

33. Increases in Current Liabilities
Increases in current liabilities increase cash

34. Decreases in Current Liabilities
Payment of a current liability decreases cash

35. Cash Flow Template: Operating
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities: +
Depreciation/depletion/amortization expense
Loss on sale of long-term assets -
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current assets other than cash
Increases in current liabilities
Decreases in current liabilities =
Net cash provided by operating activities
The first step to prepare the operating section of the cash flow statement is to lay out the template as shown above.

36. Another way to look at this aspect of the Indirect Operating Section - Through AE
__Assets = Liabilities + SH Equity
Cash Impact
Assets Liabilities SH Equity

37. Illustration: Operating Section Only
The income statement, balance sheets, and additional information for E-Games, Inc., are provided in the following Illustration. We will use this information in preparing the statement of cash flows following the four basic steps.
Step 1. OPERATING - Calculate net cash flows from operating activities, using 1.) adjusted net income and changes in 2.) current assets (other than cash) and current liabilities from the balance sheets.
Illustration: Operating Section Only
What 3 pieces of info will be useful for the operating section of the cash flow?
The income statement, balance sheets, and additional information for E-Games, Inc., are provided in the illustration. We will use this information in preparing the statement of cash flows following the four basic steps.
Lets consider the income statement first.
What 3 pieces of info will be useful for the operating section of the cash flow?
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38. Illustration (cont.) Look at the individual transactions
Loo at the individual transactions
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39. Cash Flows from Operating Activities
This is how the operating section of the statement of cash flows appears. Notice that the net cash flows from operating activities is $50,000.
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40. Check-in’s – Operating Section
For the indirect method, the operating section begins with net income? True or False (Circle one)
For the indirect method, the depreciation is subtracted from net income? True or False (Circle one)
For the indirect method, a gain is added back to net income? True or False (Circle one)
If inventory account increased by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)
If the accounts payable account decreased by $10,000 from the prior accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

41. Investing - Calculating Cash Flow Amounts
Each Long-term Asset account is reviewed for changes to see if the change resulted in a source or use of cash.
Long-term asset account changes (General Rules)
Increase long-term asset account – Use of Cash
Decrease long-term asset account – Source of Cash
Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

42. Investing - Calculating Cash Flow Amounts
Cash Flows from Investing Activities +
Sales of long-term assets (Full amount of proceeds shown here) -
Purchases of long-term assets
Collections of notes receivable
Loans to others =
Net cash provided by (used for) investing activities
$ Cash
$Benefit
Time Periods
Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

43. LO3 Investing Activities
Cash Outflow
Cash Inflow
As we have seen earlier, the second step in preparing the statement of cash flows is to determine the net cash flows from investing activities by analyzing changes in long-term asset accounts from the comparative balance sheets.
Lets consider the treatment of purchase and sale of long-term assets in the statement of cash flows with our example of E-Games.
E-Games’ investment in stock increased $35,000 during the year (from $0 in 2011 to $35,000 in 2012). In the absence of evidence to the contrary, it’s logical to assume that the increase is due to the purchase of investments during the year. We report the purchase of stock in Intendo Corporation as a cash outflow of $35,000 from investing activities.
The Land account decreased $10,000 during the year, indicating that we sold land costing $10,000. Additional-information item (2) indicates that we originally recorded the land at a cost of $10,000 but sold it for only $6,000 (resulting in a loss on the sale of land of $4,000, as recorded in the operating activities section). We report $6,000 as a cash inflow from investing activities—the actual amount of cash proceeds received from the sale.
E-Games’ Equipment account increased by $20,000 during the year. If E-Games purchased the equipment with cash, we would record a cash outflow from investing activities of $20,000. However, additional-information item indicates that the firm paid for the equipment by issuing a $20,000 note payable. No cash was exchanged in the transaction. The increase in equipment therefore represents a noncash activity, which is disclosed in the cash flow footnote. Statement above provides a summary of the cash flows from investing activities and disclosure of the noncash activity.
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44. Check-in’s – Investing Section
The investing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)
When an asset is sold, only the gain or loss is listed in the investing section. True or False (Circle one)
When an asset is sold, the amount of cash received for the sale is shown in the investing section, regardless of any gain or loss recognized. True or False (Circle one)
If a notes receivable has been paid down by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)
If new equipment is purchased in the amount of $10,000 during this accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

45. Financing - Calculating Cash Flow Amounts
Financing activities affect long-term liabilities and stockholders’ equity.
Each long-term liability and stockholders’ equity account is reviewed for changes to see if the change resulted in a source or use of cash.
Long-term liability and stockholders’ equity account changes
Increase in account – Source of Cash
Decrease in account – Use of Cash
Exceptions – Treasury Stock and Dividends
Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

46. Financing - Calculating Cash Flow Amounts
Cash Flows from Financing Activities +
Issuance of stock -
Purchase of treasury stock
Borrowing
Payment of notes and bonds payable
Payment of dividends
Net cash provided by (used in) financing activities
Financing activities affect liabilities and stockholders’ equity, such as Notes payable, Bonds payable, Long-term debt, Common stock, Paid-in capital in excess of par, and Retained earnings. A template for the financing activities section of the Statement of Cash Flows is shown above.

47. LO3 Financing Activities
Cash Inflow
Cash Outflow
Retained earnings, beg. Balance $41,000
+ Net income ,000
– Dividends (12,000)
Retained earnings, ending balance $71,000
As we have seen earlier, the third step in preparing the statement of cash flows is to determine the net cash flows from financing activities. We can find a firm’s financing activities by examining changes in long-term liabilities and stockholders’ equity accounts from the comparative balance sheets.
To understand how financing activities are recorded in the statement of cash flows, lets continue with the example of E-Games.
E-Games has only one long-term liability. The company reports an increase in notes payable of $20,000. As we saw earlier, this was in payment for equipment and represents a noncash activity disclosed in the cash flow footnote.
From the balance sheet, we conclude that common stock increased by $5,000 during the year. Item (4) of the additional information confirms that this was the result of issuing $5,000 of common stock. The $5,000 inflow of cash is reported as a financing activity.
E-Games retained earnings balance increased by $30,000 during the year. Recall from earlier chapters that the balance of retained earnings increases with net income and decreases with dividends. Since net income is $42,000 and retained earnings increased by only $30,000, the company must have declared dividends of $12,000 during the year. Additional information item (5) confirms that E-Games declared and paid dividends of $12,000 during the year. We report the payment of cash dividends as a cash outflow from financing activities.
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48. Check-in’s – Financing Section
The financing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)
If treasury stock (acquired in a prior accounting period) is reissued in the amount of $10,000 during this accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)
A new bond with a face value of $100,000 is issued at a discount and the bonds payable account is credited for $90,000. This change is shown as a source of cash or a use of cash and how much ________________? (Circle One and fill in the blank)

49. Exercise:. I = inflow (addition or source)
Exercise: I = inflow (addition or source) O = outflow (subtraction or use) NCA – non-cash activity Plus – which section?

50. Marketable securities sold for cash Long-term debt increased cash
Notes: Dividends = $5,000
Marketable securities sold for cash
Long-term debt increased cash
Notes: Dividends = $5,000
Marketable securities sold for cash
Long-term debt increased cash

52. Sources of Information for Cashflow Statement
Operating activities
Income Statement
Current Assets
Current Liabilities
Investing activities
Long-term Assets
Financing activities
Long-term Liabilities
Stockholders’ Equity

53. Income Statement
Income Statement
Balance Sheet

54. End of chapter 11
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